Masco Corporation (NYSE:MAS) Q3 2023 Earnings Call Transcript

Masco Corporation (NYSE:MAS) Q3 2023 Earnings Call Transcript October 26, 2023

Masco Corporation beats earnings expectations. Reported EPS is $1, expectations were $0.91.

Operator: Good morning, ladies and gentlemen. Welcome to Masco Corporation’s Third Quarter 2023 Conference Call. My name is Jerry and I will be your operator for today’s call. As a reminder, today’s conference call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Renee Benedict, director of FP&A and Investor Relations. You may begin.

Renee Benedict: Thank you, Jerry and good morning. Welcome to Masco Corporation’s 2023 third quarter conference call. With me today are Keith Allman, president and CEO of Masco and David Chaika, Masco’s Vice President, treasurer and Investor Relations. Our third quarter earnings release and the presentation slides are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can’t take your question now, please call me directly at 313-792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

We’ve described these risks and uncertainties in our risk factors and other disclosures in our form 10-K and our form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. our references to operating profits and earnings per share will be as adjusted unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I’ll now turn the call over to Keith.

Keith Allman: Thank you, Renee. Good morning, everyone, and thank you for joining us this morning. Before we get into our results, I want to take this opportunity to welcome Masco’s new CFO, Rick Westenberg, who joined the team on October 16th. Rick is an accomplished executive with more than 25 years of experience, including nearly 15 years leading global finance organizations. We’re excited to have Rick on board and look forward to him participating in our fourth quarter earnings call in February. I would like also to take this time to thank Dave Chaika for serving as interim CFO over the last several months. Dave quickly stepped into the position and successfully led our finance team during this transition and we greatly appreciate his support.

With that, let’s turn to our third quarter results. Please go to slide 5. In the third quarter, we demonstrated our ability to execute and the earnings power of our business model despite a challenging environment, which saw a top-line decreased 10%. Volume was down 12%, partially offset by pricing actions and favorable currency impacts of 1% each. While sales were down $225 million, our continued focus on driving cost savings initiatives and a favorable price-cost relationship resulted in an operating profit decline of only $2 million in the quarter. This strong execution resulted in operating profit margin expansion of 170 basis points to 17.6% and a decremental margin of only 1%. Our earnings per share for the quarter grew 1% to $1 per share.

Turning to our segments. plumbing sales declined 11% and local currency with North American and International Plumbing, each declining 11%. In North American Plumbing, overall demand remained soft with the wholesale and e-commerce channels performing moderately stronger than the retail channel. In International Plumbing, demand trends weakened in our key markets of Europe and China in line with our expectations. We continue to expect our overall International Plumbing market to be down high single digits for the full year. Despite the top-line decline, we successfully drove plumbing margin expansion of 230 basis points to 18.9% in the third quarter. This strong margin performance was driven by pricing actions, commodity and freight deflation and significant cost savings initiatives, particularly in our North American plumbing business.

We also completed the strategic bolt-on acquisition of Sauna360, a leader in the sauna, steam, and infrared wellness industry. This acquisition complements our spa business, expands our wellness product offerings and leverages Watkins expansive dealer networks. Turning to our Decorative Architectural segment, sales declined 10% in the quarter. DIY paint sales declined low double digits. Propane sales declined low single digits against a mid-teens comp in the third quarter of 2022. On a three-year stack basis, our propane comp is over 65%, demonstrating a significant market share, we have captured with propaners through the strength of the Behr brand, quality of our products and our commitment to exceptional service. Together with our partner, the Home Depot, we believe we have a significant opportunity to continue to grow share in the propane market.

Additionally, we are honored that Behr was recognized as the Home Depot 2023 Marketing Innovation Partner of the Year. This recognition is a testament to our creative marketing campaigns and our 45-year partnership with the Home Depot. Turning to capital allocation. We continue to generate significant free cash flow during the quarter and maintain a strong balance sheet. As a result, we executed on our balanced capital deployment strategy and returned $109 million to shareholders through dividends and share repurchases, including buying back 800,000 shares for $45 million in the quarter. Now, turning to our outlook for the remainder of 2023. With our strong execution, we now anticipate earnings per share for 2023 to be in the range of $3.65 to $3.75 per share, up from our previous guidance of $3.50 to $3.65.

While the near-term demand for the repair and remodel market remains uncertain. We will stay focused on controlling what we can by closely managing costs, minimizing the impact of lower volumes and driving our margins back to at least 2019 levels of 18% each segment. We believe our portfolio of low-ticket repair and remodel products, our market-leading brands and innovation, and our geographic diversification positions us for growth and stability through cycles. As we look over the longer term, we believe the fundamentals of our repair and remodel markets are strong and supportive of long-term growth. These include high home equity levels, the age of housing stock, and home owners staying in their homes longer. We remain committed to investing in our brands, capabilities, and people to drive strong growth when market conditions improve.

With favorable fundamentals and the continued successful execution of our growth strategy, along with our free cash flow and disciplined capital deployment, we are well positioned to drive value creation for the long term. On our fourth quarter call, we will provide our 2024 outlook, as well as an updated view on the margin expansion potential of our business over the longer term. I’d like to conclude with a thank you to our employees for their hard work and dedication to driving operational excellence and delivering for our customers and shareholders. Now, I’ll turn the call over to Dave to go over our third quarter results and 2023 outlook in more detail. Dave?

David Chaika: Thank you, Keith, and good morning, everyone. As Renee mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning to slide 7. Sales in the quarter decreased 10% and excluding currency decreased 11%. North American and international sales both decreased 11% in local currency. Our continued focus on operational efficiency helped drive gross margin expansion of 430 basis points to 35.8%. Our SG&A as a percent of sales was 18.2%. Despite our decline in sales, operating profit in the third quarter is $348 million, down only slightly year-over-year. Operating margin expanded 170 basis points to 17.6%. The strong operating profit in margin performance was due to pricing actions, lower freight and commodity costs, and cost saving initiatives, offset by lower volumes, resulting in EPS growth of 1%, the $1 per share.

Lastly, in the third quarter, we received an insurance settlement in our decorative Architectural Products segment, related to the severe weather event that occurred in Texas in 2021. This weather event significantly impacted our suppliers’ ability to produce the raw materials necessary for us to manufacture certain paints and other coating products. This settlement has been excluded from our results as a non-GAAP adjustment. Turning to slide 8. Plumbing sales in the quarter decreased 10% and excluding currency decreased 11%. Lower volume decreased sales by 14%, partially offset by net selling prices, which increased sales by 3%. North American plumbing sales decreased 11% in local currency. International plumbing sales decreased 11% in local currency as demand continued to soften in many European markets and China.

Segment operating profit in the third quarter was $225 million, up $5 million year-over-year, and operating margin expanded 230 basis points to 18.9%. Operating profit improvement was driven by pricing actions, lower freight and commodity costs, and cost saving initiatives, partially offset by lower volumes. The completion of our Sauna360 acquisition had minimal impact on our results due to closing late in the third quarter. Turning to slide 9. Decorative Architectural sales decreased 10% for the third quarter. Paint sales declined high single digits with propane sales decreasing low single digits against the mid-teens comp in the third quarter of 2022. With a two-year pro sales comp in the mid-teens and a three-year pro sales comp of over 65%, we are clearly demonstrating in a significant share we have gained and retained over the past three years.

Operating profit was $144 million and operating margin expanded 110 basis points to 18.3%. Operating profit was impacted by lower volumes, partially offset by cost saving initiatives. We are also starting to see relief in certain paint input costs with modest low single-digit deflation in the third quarter, and we expect modest low single digit deflation in the fourth quarter on these raw materials. For the full year, we continue to anticipate low single-digit inflation for our paint raw material basket, with second half deflation not fully offsetting first half inflation. Turning to slide 10. our balance sheet remains strong with net debt-to-EBITDA at 1.7 times a quarter-end and approximately $1.6 billion of balance sheet liquidity. Working capital as a percent of sales improved 40 basis points to 18.1%, and net working capital days improved by 12 days, primarily due to lower inventories.

With this improvement in working capital, net cash from operating activities year-to-date was $928 million, an improvement of $408 million compared to prior year. We expect free cash flow conversion to be approximately 110% for the full year. During the third quarter, we repurchased approximately 800,000 shares for $45 million. Share repurchases were lower in the quarter as a result of us completing the acquisition of Sauna360. We continue to execute on our disciplined capital allocation strategy and anticipate deploying approximately $500 million to share repurchases and acquisitions for the full year. With the acquisition of Sauna360 for approximately €124 million and year-to-date share repurchases of approximately $125 million. We expect to deploy up to $225 million for share repurchases in the fourth quarter, subject to market conditions.

This will bring our full-year share repurchases to approximately $350 million. Now, let’s turn to slide 11 for our updated outlook for the year. For Masco overall, our top line is developing largely as expected and we continue to expect sales to decline in the range of 10%. However, with our strong execution year-to-date and margin performance, we now expect full-year margins to be approximately 16.5%, increased from our previous guide of approximately 16%. In our plumbing segment, we expect 2023 sales to be down in the range of 9% to 10%, improved from our previous expectation of down 10% to 12%. We also anticipate the full-year plumbing margins to improve and be approximately 17.5%, increased from our previous guide of approximately 17%. In our Decorative Architectural Segment, we continue to expect sales to be down in the range of 8% to 10%.

However, we do expect our decorative margins to improve and be approximately 17.5%, increased from our previous guidance of approximately 17% due to cost saving initiatives. Finally, as Keith mentioned earlier, thanks for our strong execution, our 2023 EPS estimate is now at $3.65 to $3.75, up from our previous guide of $3.50 to $3.65. This assumes a 24% effective tax rate and a $227 million average diluted share count for the year, which is slightly higher than the $226 million share count we guided to last quarter. Additional modeling assumptions for 2023 can be found on slide 14 of our earnings deck. With that, I’d like to open the call for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Michael Rehaut of JPMorgan. Please go ahead.

Michael Rehaut: Thanks. Good morning, everyone.

Keith Allman: Good morning, Mike.

David Chaika: Good morning, Mike.

Michael Rehaut: I wanted to start with the increased guidance and driven by the higher margin outlook, and really zero in a little bit on kind of the drivers of each and specifically trying to think about cost saving initiatives, as well as raw material trends and how we should think about any of these benefits as perhaps they’ve begun to accrue as you’ve moved throughout 2023. And if there’s any way to think about carryover benefits on either the cost saves or the raw materials trends as we look into 2024.

Keith Allman: So, we clearly have Mike, margin momentum going into 2024 and that will continue. the main drivers of our margin, our variable cost productivity a little bit on the fixed cost side. We’ve talked about a small plumbing plant that we’ve closed, but really, it’s about continuous improvement in that culture of execution that we’ve demonstrated in the past and continue to do that. So, we’ve got good productivity initiatives that we’re driving. we’ve had some pull-through of now full-year benefit of price increases that we’ve executed mid-year last year that’s now affecting us full year this year and we’re getting full benefit of that by and large here in the third quarter. And we expect that to continue and of course, if commodities stay where they are or maybe even change to the lower side going into ‘24, that would be a benefit for us as well leading into 2024.

So, I think the margin story for us in summary is that we’ve got good momentum here coming through in this quarter and there will be some benefits for us as we look into ‘24.

Michael Rehaut: Okay. Appreciate it. I guess secondly, we had a competitor last night talk about in early thoughts around 2024 and kind of shared expectations for the market to be down slightly based on current trends. I was wondering if that’s something that at this point again, given how you’ve seen the trajectory play out so far in 2023 and given still kind of depressed, existing home sale turnover. If that kind of matches directionally at least the way you’re thinking about things at this point and how you overall kind of characterize the demand backdrop, I know, as you’ve kind of noted 2023 has played out as you’ve largely expected. but clearly, some of the headwinds appear to be you know at least in place as we’re entering ‘24 at this point.

Keith Allman: Yes. Mike, as I said, we’ll be providing a lot more detailed view on 2024 on our fourth quarter call in February, in terms of sharing some of our initial thoughts and perspective on what ‘24 looks like as we sit here today. I would say that our assessment of the market based on what we’re seeing now in terms of our order patterns and our view agrees with most industry experts and economists, I’d say, in that, it looks to us like ‘24 is going to be a flattish year for R&R. We have rates being stubborn and holding up. Consumers are still getting a little pinched by that existing home sales are at what I think is about a 20-year low. I would say, generally speaking, for our view of 2024 and R&R, that it’s going to be flattish.

And in that flattish environment, we fully expect to outperform the market and grow and expand margins. We have leading brands around the globe with Delta and hansgrohe. We have demonstrated and have strong share gain momentum with our innovation pipeline, our new products and our leading channel positions, particularly in wholesale and our premium position in China, which is holding up better than some of the lower-priced segments in China. So, we’ve demonstrated our ability to grow, and retain share in propane. That will continue, because we’re focused on that. And you see that we are continuing to invest behind that initiative. So, I think that top-line story together with our demonstrated margin momentum, we’re focused on margin execution.